Embedded Lease
Category
ASC 842
An embedded lease exists when a contract that is not nominally a lease contains a lease component, granting the right to control the use of an identified asset for a period of time in exchange for consideration. Identifying embedded leases is a critical step in ASC 842 compliance.
Why it matters
Embedded leases are one of the most commonly missed items in lease accounting compliance. They hide inside service contracts, supply agreements, logistics arrangements, and outsourcing agreements. A contract for dedicated warehouse space within a logistics agreement, or dedicated server capacity in a hosting contract, may contain an embedded lease.
Identifying embedded leases requires analyzing whether the contract involves an identified asset and whether the customer controls the use of that asset. Missing embedded leases means understating lease liabilities on the balance sheet, a potential audit finding and restatement risk.
How Arvexi handles this
Arvexi's AI agent helps identify potential embedded leases by analyzing contract language for indicators of identified assets and control rights. When an embedded lease is identified, the platform separates the lease and non-lease components and applies the appropriate accounting treatment to each.